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Tuesday, 17 July 2012

Grounds for Divorce

It came in a letter. A photocopied letter, not even an original. It came not from Bramall Lane, but from Bastion Place, Level 20, 5 Place du Champ de Mars, Brussels, the Head Office of Sheffield United PLC. It came in the name of "The Seldom Seen Kid" - Kevin McCabe, majority shareholder in Sheffield United plc, itself the 100% owner of Sheffield United F.C. In four brief paragraphs it cast a dark shadow over the start of Sheffield United's season at a point when the club's financial situation is provoking as much discussion as on-pitch affairs. With limited detail provided in the communication, fans are already trying to fill in the gaps.

The letter, reproduced below, informs shareholders oft he intention to transfer the Fixed Assets of Sheffield United F.C. to Sheffield United plc. Without further detail we are to assume that this will be the Ground and the Academy, as properties such as the hotel and business centre have been transferred in recent years.

How have we arrived at this position? Some disastrous boardroom decisions have seen United fail to hold a position in the Premier League, make disastrous managerial appointments, fail to bounce-back within the parachute payment period, throw money at the problem in the hope that high transfer fees and above average wages will attract players capable of lifting the club. The aforementioned over-paid players under-perform and, alongside a managerial merry-go-round, United are relegated to League One. With the club committed to a cost base of a decent sized Championship club and diminishing turnover, the club is subsidised by businessman and fan Kevin McCabe, who for several years has been looking for a back-seat or a way out. We don't bounce back at the first attempt and now face difficulty making the SCMP ruling for League One clubs.

With a combination of debt and equity (recent debt to equity conversions have reduced the debt owed to McCabe and his companies) tied up in United to the tune of around £50m, McCabe isn't going to recover that in any sale of the club. He will be lucky to get a third of that amount. Despite claims to the contrary in the letter, my first assumption was that, with this transfer, Kevin McCabe is securing his investment.

The lease costs charged to the football club will provide an income stream into the plc and a means of establishing a return on investment over a period of time. The question remains how much will the rental charges be? How will they be calculated? For what period are they in place?

We know of clubs where this situation has proved costly.Leeds have a rental millstone of approximately £1.85m a year round their neck. For other clubs, such as Crystal Palace, Wrexham, Rotherham United, the separation of ownership of club and ground has brought them to their knees financially. The difference here is that isn't a separate party owning the ground - well not until the football club is sold - as was the case at Wrexham and Rotherham. Neither is it in the hands of a British Virgin Islands company, like Elland Road is. That should, perhaps, give us some comfort.

The claim that it is aimed at making the football club more attractive for investors is a strange one. Why would you invest in a football club with no ground rather than a football club with a ground? What are you investing in? A loss making business with no real estate and an ever-decreasing amount of goodwill? People have suggested that things will be more comfortable financially as we have to limit spending on players' wages to 65% of turnover, ignoring the vast amount of other costs expended by the club and the clear difficulty the club is having in achieving the cap. The SCMP does not guarantee a break even business, never mind a profitable one. It is there to limit the extent a club overstretches itself, chasing success.

Even if someone sees it as a cheap investment with potential of making something back when Premier League status is achieved, there is plenty of proof that throwing money at it doesn't work; Leicester City, Cardiff City, Nottingham Forest. We have also proved this, given the size of our wage bill when relegated was north of £13m. And now,the Financial Fair Play rules further up the line in the Championship mean that benefactors pushing cash into wages and transfer fees is not going to be the answer.

Certainly investing in the property market is not what people want to do in a recession. So allowing potential investors to invest in the football business without the downturn in property prices affecting their investment negatively is a positive. It has the added bonus for shareholders in Sheffield United plc that they retain the position they had before. However, given the lack of assets and lack of ability to pump money with no guarantee of return, is it really that attractive a prospect?

Another view and one expressed by a fan of a club who have been down this route themselves, is that this has all the hallmarks of asset stripping prior to an administration. Thus protecting the valuable assets before wiping the slate clean, leading to a ten point deduction and a more stable financial starting point. Previously administration has never really been considered as a possibility - why would Kevin McCabe receive even less back on his "investment" than he would by an eventual sale? Yet now, what does he have to lose?

One train of thought could be that he has a view to another site, maybe Don Valley Stadium? Maybe the failure to achieve Premier league status and develop the stadium, alongside the knockback of failing to make the shortlist for the England World Cup bid stadia was a final straw?

As much as the idea abhors me, this possibly has more legs than you might imagine. The DVS to me is a bit of a white elephant in the city. Since it lost Grand Prix B class events to Gateshead/Birmingham and doesn't even attract National Championships at anything above school or University level, we have a top class, 25,000 capacity sports stadium that holds the odd pop concert, some Sheffield Eagles matches, was a temporary home to Rotherham United and is a base for local athletes to train. For a vast majority of the year it has 20,000 unused seats, under-utilised potential and a running track.

Yet to someone interested in an easy development, it is has decent transport links with the tram network and being close to the motorway,it requires limited development to take it to a similar or higher capacity than Bramall Lane. Why would they worry about the running track, the distance from the pitch? Meanwhile the Bramall Lane site already has an office dand hotel evelopment on it and sits less than a mile from Sheffield city centre. By no means prime development land, but still an attractive prospect.

Having considered all these scenarios and more I think I would be more worried if the club was in the hands of a person who doesn't profess to be a Blade, Mike McDonald anyone? But in the absence of any detailed statement suspicions are going to be aroused. Not least on the back of mooted cost -cutting and redundancies at the club.

Fans are not asking for a multiple page report on why this is being done and the implications for the football club, but surely a couple of paragraphs or a page at the most would suffice? All this letter has done is create a lot of worry across the fan-base, with varying opinions and perceptions of what it all means and many questions unanswered. I have shared a few of those possibilities here. Is it not asking too much to have these questions answered in Layman's terms?

Will there be clauses/agreements in place to ensure that the ground is to remain in use for football in perpetuity?

Is the rent a peppercorn rent or commercial rent?

Will the club remain responsible for the upkeep and maintenance of the stadium and academy?

Will the rent be charged until his debts are paid off?

Will the rent be seen as income for his family after debts are paid off?

Is there an intention to sell off the land for developmentat any point in time or their interest in the plc?

Will a potential buyer of the football club have the opportunity to move the club elsewhere or will it be a condition of any sale that United remain at Bramall Lane?

In the ultimate irony, the letter from Brussels has a statement across the top.

"Bramall Lane -The World's Oldest Professional Football Stadium"

Let's hope it is a claim to fame we can still make in 10 or 15 years' time. For now, none of us can be too sure and all we have are basic facts and supposition.

17 comments:

Generally, as you point out, no good comes of splitting the ground from the club.

Actually, though, in many cases, the split is a symptom, rather than the cause of a malaise. Take us (Rotherham) as an example. It wasn't the sale of Millmoor that did for us; it was the unsustainable overdraft that we couldn't repay from trading or player sales that did for us. We couldn't sustain the lowest wage bill in Championship history, we traded using debt and the only option was to realise the value inherent in the ground or fold.

The problem, of course, was that an absence of debt didn't transform the underlying trading difficulties. We still couldn't afford even an average league one budget (and pay the new fixed costs of the lease of the ground). So, we ended up, 12 months later or so, in exactly the same boat, only this time without any assets capable of being realised for cash. Result? Near death experience number two. 18 months after that? Exactly the same thing. Nearer death experience. (Or actual death, it sometimes felt in the funereal DVS atmosphere).

So Blades should be bricking it then? Not necessarily. There's no immediate sign that this is a deal to keep the wolves from the door. It's more likely that this is a balance sheet restructuring, which (in order to sweeten it) will see a significant wedge of intra-group debt disappear in return for the loss of the fixed assets. It might (counter-intuitively) make the shares in the club more valuable (or, at least, potentially more valuable in the slightly Alice in Wonderland world of equity investment).

Fundamentally, what it does is change the nature of investor in the club. As things stand, if you want to buy SUFC, you need to pay (effectively) for the real estate, which has a tangible, objective value. That will take a fair slug out of any fighting fund. If you've that sort of money, there are probably other, higher placed clubs available out there. (Everton, for example, is probably a similar order of investment and actually a similar dynamic in some ways - look how they've struggled to get investment).

After this transfer, the value of the club is essentially intangible - brand, "potential" (dread word), prospective gate receipts etc - and inherently depressed by being in League One. So, suddenly, the field of prospective investors widens.

The trouble is that the way to make money out of a club that has no tangible assets is to get it to a level where the operation of the club generates loads of cash, which can repay any outlay to get there and allow a return. Or the Premier League as it's known. And it's great if it works. But if it doesn't, it risks making the club's operation reliant on third party funding, which is ever finite. And because there's no tangible asset to lose, the option of cutting your losses and putting the thing into an insolvency is that much more easy (and possibly attractive).

The flip side of that is that, with the ground in the ownership of a "benign" landlord (McCabe is a Blade, right?), you don't stand to lose Bramall Lane in that nightmare scenario (unlike how we lost Millmoor). So, in one sense, this move makes the club a punt, but minimises the maximum losses to the nebulous concept of SUFC if it all goes wrong.

In the longer term, there are questions. If property prices recover, the ground, with sitting tenant on a long term lease (required for the FL's security of tenure rules) becomes an investable proposition. Take the benign owner away and things aren't so much fun (see Portsmouth).

Also, once the ownership truly splits, mindsets alter. The first Millmoor lease was pretty favourable to the club, because it was signed up to by the then owner, acting as such. By the time of the first insolvency and the negotiation of a new lease, the deal was much more commercially focussed - it wasn't Rotherham's ground, it was a CF Booth asset and the deal was a proper arm's length negotiation. What's cosy and friendly now mightn't be in a few years time.

Meanwhile, the club didn't do anything to finish the main stand or improve Millmoor, a ground it didn't own and so wouldn't feel the full benefit of improving. The ground atrophied. The club became, simply, a collection of player contracts, kit and commercial stock. There was no plan, beyond the idea that getting promoted would be useful, and that was a function of the absence of ground ownership.

In short, this isn't (I wouldn't think) the precursor to meltdown. Rather, it's probably an acceptance that there isn't anyone out there with pockets as deep as the existing owner, so if he wants shut of the cash drain of the football club, he has to make it available to a different level of operator. In the short term, there might be some excitement, as cash rich types emerge and go on a spending spree. In the longer term, see general rule above...

Well said David. It certainly widens the net for investors. As a united fan though I understand the suspicion this is viewed with by others particularly after James Beattie's flu and subsequent sale. Trust between the management and fans is at a low point in recent years. Time will tell I suppose.

Beware. As usual this is possibly OK if your owner is a true fan, but it opens the floodgates to financial problems - if they aren't already there. If your 'true fan' owner has to let go, or other investors become a powerful voice, then you are wide open to exploitation of less scrupulous owners.

As mentioned, it could be a symptom of problems to come or of an owner protecting his investment. Balram Chainrai did something similar at Pompey in putting a charge on the ground for more than it was worth in order to protect loans made to the club. 2 administrations later the club is teetering on the edge of liquidation as he still struggles to hold on to the delusion he can milk 18m from a 2.1m asset. (Details of this on the TwoHundredPercent website if you want to know how it was done)

What concerns me more in United's case is the problem of the SCMP - what turnover will the club be working on to fund its playing squad? Not having the ground as part of the club's business will severely diminish income. Ask Coventry, Doncaster et al. I can't see how David's idea of 'cash rich' investors helps as SCMP prevents inward investment in players from this season on, with tighter controls and sanctions available to the Football League and a strict 65% wages to turnover rule in force. Inward investment can only be spent on infrastructure.

The SCMP point is a good one. The lease will be interesting here: who gets the concession income etc. What about midweek functions/conferencing etc.?

I suppose what I'm saying is not that this sets up a financial doping, but that it allows a less wealthy investor to buy the club. Given the club hasn't sold, this might be a means of prepping it for sale on a different basis. I.e. this is about the present owner getting out of operating the club, rather than the thing's going bust so we need some cash fast. (Although it could be the latter).

I definitely agree that, in general, no good comes of this sort of transaction (not sure there is an example of a club doing actively well out of a deal like this is there?). But equally, there is a more US style investment model creeping into the English game, where the "franchise" is the critical thing, with the ground being a separate business, effectively. This may be a response to that.

Marvellous that your pointless, parasitic club is dying a slow painful death and no one, not even the vomit inducing dave whelan is slightly bothered. What goes around comes around my northern amigos. Brilliant!